Forex Comment Jun 08

When Bloomberg and G/Sachs agree, watch your wallet

Arguments for significant capital outflows from China and Hong Kong more likely represent analysts' political and ideological preferences, not the relevant facts

When Bloomberg and G/Sachs agree, watch your wallet
Image: iStock.

(ATF) Last week, a Goldman Sachs analyst forecast that the yuan would weaken to 7.25 per dollar. I sharply disagreed with him and forecast a stable yuan in the 7.05 - 7.10 range.

Alas, I'm not Goldman Sachs (I used to work for a competitor) and won't blame Bloomberg for picking up on the bank's analysis rather than this commentator's. But caution is called for. 

It's frequently been observed that Goldman analysts point in one direction and Goldman traders the opposite direction. That may not be the case now, but the arguments for significant capital outflows from China and Hong Kong – if not a head fake – more likely represent analysts' political and ideological preferences, not the relevant facts.

China, far from experiencing capital flight, just massively added to its foreign exchange reserves, as its May trade surplus surged to a record $63 billion. Hong Kong has seen strong capital inflows for an extended period and the HKMA (de facto central bank) had to intervene once again last Friday to keep the HKD from crossing to the strong side of its trading band with the US dollar.

Today, at 7pm HK time, the HKD trades at 7.7501, right on the edge.

The PBoC set yuan parity on Monday morning at 7.0882, the strongest since mid-May. It rose from there to 7.0744 at 7pm.

Tomorrow morning, China reports May CPI and PPI numbers, and the PPI is the one to keep a close eye on. It slipped deep into deflationary territory in April, to -3.1%. Forecasts range from -2.5% to -3.5%. Anything close to the latter number will add more upward pressure to the Chinese currency.

No, Messrs. Goldman and Bloomberg, currency weakness is not a PBoC concern at this point. Deflation is.

It should be expected that the central bank will decide on some added monetary easing in the very near-term if deflation deepens.

If anyone wants to look for a weak currency, it's not far from view. At 97.0200 on the DXY (dollar index), the US dollar is at its weakest since March.